StarGate V2 Introduction

StarGate V1 was launched in March 2022 and quickly became headline news. Within days of its launch, billions of dollars were deposited into its liquidity pool, and Alameda Research snatched up all publicly auctioned STG Token. Since then, StarGate has become one of the leading bridges in the ecosystem, with over $36 billion in volume and $20 million in fees.

Skeptics may argue that LayerZero’s Airdrop played a role in these numbers. It would be unfair to attribute StarGate’s success solely to Airdrop hype. Among all these metrics, there are some practical use cases, and we all agree that StarGate is one of the better bridges in the ecosystem - the approximately 17% of LI.FI captured demonstrates its effectiveness as a bridge solution.

However, it has been a long time since the release of StarGate V1. Two years in the cryptocurrency field are like ten years in traditional markets. StarGate needs an upgrade, and V2 promises to make it cheaper and easier to scale to more chains.

This article will discuss why StarGate V2 is necessary, the new features that improve the limitations of V1, and how V2 will keep StarGate in its top bridge position in the coming years.

Let’s get started!

The Necessity of StarGate V2

Since the launch of StarGate V1 more than two years ago, the multi-chain ecosystem has undergone tremendous changes. Initially, the concept of multi-chain was just unfolding, but now it is claimed that we are looking forward to a future with thousands of chains.

Let’s take a look at some major changes in the multi-chain environment, which form the basis of many design decisions and features of StarGate V2:

The number of chains with significant appeal continues to increase - the number of chains regularly interacted with by ordinary users has increased, and this number will only continue to grow. In the long term, when StarGate was launched in March 2022, approximately $7 billion was locked on L2. Now, this number is close to $39 billion, with several L2s holding over $1 billion. In addition, first-layer networks like Solana process daily volumes in the billions, while emerging third-layer networks like Degen Chain are also becoming increasingly popular.

2. Surging Packaged Assets - StarGate V1 Highly Follows Local Assets, and it is predicted that they will experience extensive expansion with the emergence of new chains. However, this prediction has not been realized as expected. The expansion of major Stable Coins such as USDC and USDT on various chains has lagged behind the rapid deployment of new chains. Due to the slow availability of native assets, blockchains have turned to using packaged versions of these assets as their standard assets.

3. Cheaper and faster competition - Although StarGate offers competitive bridging fees, its high gas costs increase the overall cost for users. This makes StarGate more expensive than other bridges and affects the quantity it captures through the aggregator.

Due to the high cost of gas, the total output through StarGate is lower than that of competitors. Source: Jumper

The high Gas cost of StarGate is due to:

a） Delta Algorithm — This Algorithm pre-allocates credit to different on-chain pools to ensure instant guarantee of final results. However, managing these points on-chain requires a lot of gas consumption.

b) LayerZero’s message delivery cost - Each StarGate transaction requires sending Cross-Chain Interaction messages through LayerZero, which will increase the overall transmission cost.

StarGate must face these challenges, and V2 introduces new features to achieve this goal. Let’s take a closer look at some of the most important features.

StarGate V2 What’s new?

Considering the drop cost, expansion to more chains, and capital efficiency, the new additions to StarGate V2 are as follows:

Hydra: Providing bridging services for more chains

Hydra is StarGate’s response to the ever-changing needs of the multi-chain world. It is a Bridging-as-a-Service (BaaS) solution that enables new chains to integrate with StarGate using assets packaged in Hydra, based on the Omnichain Fungible Token (OFT) standard. Learn more about the OFT standard here.

This integration is a win-win for the chains supported by StarGate and Hydra:

Hydra Chain is connected to the extensive chain network of StarGate, allowing assets to be bridged with established chains such as Arbitrum or other Hydra-compatible chains. This is a huge benefit for new chains, as they no longer need to deploy pools on-chain for every new connection they want to establish.

This also makes life easier for StarGate users - no need to manually select compatible chains for bridging, as they can now bridge assets from any supported chain to the Hydra chain.

Other advantages of Hydra chain include:

Source: StarGate V2 Proposal

For StarGate, Hydra improves capital efficiency by introducing Protocol Locked Liquidity (PLL) based on the OFT standard protocol.

When a chain adopts Hydra, it will mint assets according to the OFT standard. This involves locking the assets on-chain at the core of the bridge asset, StarGate.

For example, when bridging USDC from Arbitrum to Hydra, USDC will be locked in the contract of StarGate. At the same time, Hydra on-chain mints an equivalent amount of USDC (OFT).

This operation locks the user’s original USDC in the StarGate contract, where they will be held until the user returns to Arbitrum or another core chain of StarGate. At the same time, these assets help to lock the Liquidity of the protocol in StarGate, enabling StarGate to increase credit in its account system and optimize Liquidity within the StarGate chain ecosystem.

The most ingenious part is the dynamic network effect, as more chains adopt Hydra, this effect will be amplified, increasing internal credit and generating additional protocol lock Liquidity, thus creating a powerful flywheel effect.

Other advantages of the StarGate protocol include:

Source: StarGate V2 Proposal

Trading batch processing at a cost of drop

StarGate’s current Transaction Cost includes part of the LayerZero messaging fee. Critics often point out the inefficiency and high cost of transmitting messages for each Cross-Chain Interaction.

To address this issue, StarGate V2 introduces transaction batching through LayerZero V2, allowing multiple transactions to be batched into a single LayerZero message.

This batch processing function is designed to drop the burden of cross-chain interaction transaction cost by allowing users to share the burden of gas and message fees. Essentially, users can consolidate their transactions instead of each paying the full cost, but sharing the cost.

StarGate V2 proposal compares batch trading to buying ‘bus tickets’ for transactions. Each ‘bus’ represents a batch with a certain trading capacity, and it will depart when full or when users pay for expedited processing.

Is Primo at the helm?

Choosing ‘Bus’ means users can enjoy the drop fee, even if the batch is not full. However, users can also choose to maximize cost savings by waiting for the batch to be fully filled - this brings a trade-off between cost and speed for users. To ensure a smooth user experience and minimize waiting time, regular scheduled bus services will also be implemented on each route within the Bus feature.

For users seeking instant transaction processing, you can choose a “taxi” - more expensive than a bus, but still more affordable than StarGate V1. Taxis provide immediate departure and on-chain finality of destination.

AI Planning Module to Improve Capital Efficiency

Unlike StarGate V1 with a static credit accounting mechanism, StarGate V2 introduces an Artificial Intelligence Planning Module (AIPM) - an off-chain entity aimed at dynamically managing the allocation of credit and fees within the StarGate protocol to optimize Liquidity, Slippage, and Transaction Cost.

The main differences between the static credit accounting system of V1 and the AIPM of V2 include:

However, it must be pointed out that AIPM is a trusted Allowlist entity, initially operated by the StarGate Foundation for DAO. In the worst case, issues with AIPM and its operating entities will lead to latency problems for StarGate. This is because AIPM is only granted specific permissions to modify the credit system, ensuring that its operations are limited to credit management and there is no risk of directly affecting user funds, as it cannot interact with Tokens and StarGate’s messaging layer.

Bull Market and Bear Market Cases of StarGate V2

The following is an analysis of the potential smooth scenario (Bull Market scenario) and the potential obstacles (Bear Market scenario) that StarGate V2 may face:

Bull Market Situation

• The extensive adoption of Hydra - if the bridge-as-a-service model of StarGate gains tremendous attraction in the new chain, the resulting network effect could be enormous. This adoption will not only promote the expansion of StarGate on multiple on-chain platforms, but also make it the preferred bridge platform for these chains by using Hydra-wrapped assets (OFT) as the standard assets in these ecosystems. In addition, as the usage of Hydra increases, the Liquidity locked in the StarGate protocol will also increase. This will create a self-sustaining flywheel, organically increasing the LiquidityDepth of StarGate, eliminating the need for external incentives (such as STG emissions).
• The drop in Transaction Cost makes StarGate the most recommended route on the aggregator - as aggregators like LI.FI become increasingly popular in the market and guide more order flow through interfaces such as Jumper and B2B integration, the lower transaction cost of StarGate drop may give it a competitive advantage. Cheaper transactions on StarGate can enable it to surpass the quotes of other bridges and win more order flow through the aggregator.

Bear Market Case

• The adoption of Hydra is limited - the competition to become the preferred bridge supplier for the chain is very fierce, and countless bridges are vying for transactions. If other bridge protocols offer similar or better services, the adoption of Hydra may fail. However, I believe that Hydra’s commitment to instant global connectivity with all StarGate integrated chains will be an attractive option for new chains.

Secondly, the success of Hydra depends on the assumption that the ecosystem will continue to see a surge of new chains. If the number of successful new chains does not meet expectations, the demand for Hydra will decrease.

In addition, if issuers of major native assets such as USDC (Circle) and USDT (Tether) become more active in chain expansion work, the demand for Hydra-wrapped assets may weaken. This will make the service less important.

However, it is worth noting that Hydra Hydra USDC complies with Circle’s bridge USDC standard. If StarGate decides to expand its service to the chain, this enables StarGate to potentially integrate the on-chain native USDC status of Hydra into Circle. This arrangement can create a beneficial dynamic, as Hydra USDC can serve as an adoption metric to help Circle determine whether a chain is worth its native support. Currently, this synergistic relationship between Hydra assets and stablecoins is only feasible with USDC, as other assets such as USDT do not have a similar standard.

• Competition from intent-based bridges - the market is increasingly favoring intent-based bridges, such as Across, which can achieve fast and affordable bridges. Although StarGate V2 aims to reduce costs, it may not necessarily improve transaction speed. This may bring potential problems, especially in the aggregator environment where Across and StarGate are currently competing for order flow. The speed and cost advantages of Across on numerous routes may allow it to outperform aggregators in terms of aggregation, potentially reducing StarGate’s market share.

Conclusion

The upcoming launch of StarGate V2 marks an important moment in the bridge field. In my opinion, the most prominent feature of StarGate V2 is Hydra. Its potential to create unparalleled network effects is enormous, as the assets wrapped by Hydra may become integrated on-chain standard assets, providing a huge advantage for StarGate compared to other bridges. I am very curious about the adoption rate of Hydra in the coming months.

What is your favorite feature in StarGate V2? Do you think StarGate will maintain its position as a leading ecosystem bridge? Share your thoughts in the comments!

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